Intellectual Property As Security

Introduction

The evolution of Intellectual Property laws and standards are all in the direction of maximizing private rights and not give importance to public interests.[1] There is always an inconsistency between the valuation of a company as a whole and the law protects as intellectual property. The technical and managerial knowledge and skills which are used by the company are valuable but in a legal sense it is difficult to be termed as 'property'.[2] Copyright, patents, trademarks, and designs all our intellectual property but each one of them is protected to a different standard.

Most precisely the Intellectual Property is the borrower's to give in security.[3] IP rights can increase a company’s asset value, and valuing these assets will help top management to make informed investment and marketing decisions.[4] There are majorly three ways by which we can undertake the security over Intellectual Property. 

  1. The lender takes ownership and then licenses it to the borrower.
  2. The borrower retains ownership but simultaneously grants an interest of the IP to the lender.
  3. The revenue received from the intellectual property can be used by borrowers as security on a loan.[5]

On the contrary, there are several ways in which security can be affected by IP rights but initially for this too the lender must have determined the value in taking security over IP rights.[6]

The UNCITRAL legislative guide observed that the security rights over IP may be created by written agreement between the grantor and secured creditor. Because the written document shows conduct between the parties and also evidences between the parties to create a security right.[7]The United Nations Commission on International Trade Law (UNCITRAL) in 2007 also established a Working Group to address security rights which also covers IP financing. This Working Group was recommended to develop an efficient legal regime for security rights in goods and also to identify the issues, form of the instrument, and the exact scope of assets that could serve as security.[8] A security interest in intellectual property and ascertaining that the debtor has clear and complete title to the property are some areas clouded with unresolved legal issues.[9]

Legal Aspects

Securitization of IP is different from the securitization of other kinds of traditional assets like mortgages and credit cards because IPRs are the form of a personal property that can be bought, sold, licensed, or traded in the same way as any other form of property.[10] In litigation IP rights are governed by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This act covers that the expression property specifically includes intangible assets[11] and also defines “security interest”[12] as a right.[13]

At least nine international investment arbitration proceedings that are related to IPR have been initiated in the past decade. Intellectual property becomes worthless as security if it cannot be separated from the underlying business of the company, then in such a scenario, it is impossible to evaluate also. Currently, there is still a great amount of uncertainty about the correct way to the valuation of intellectual property. The major problem is the separability of the intellectual property, the intangible nature of IP assets, and the limited number of market transactions in intellectual property.[14]

There are so many challenges faced by authorities regarding the Securitization of IP; Firstly, there is some inconsistency with laws that prevail. In other words, intellectual property can be governed either by the intellectual property laws or by secured transactions laws. Moreover, in some places, they are governed by both and this creates some uncertainty between the two regimes. Secondly, the recognition of security rights is important and some jurisdictions do not recognize the security rights e.g. types of IP assets as a trade secret, databases, etc. Thirdly, there is a limitation regarding the transferability of IP or in other words, some specific rules of law limit the ability of an owner, licensor or licensee to create a security right in certain types of intellectual property.

Intellectual property potentially has no bounds. In reality, intellectual property rights are bounded by the repelling of challenges only. So the key mechanism or solution for the same is policing and protection of the copying, use, and exploitation of intellectual property rights in a society so that demarcation would become possible in business interest.[15]  IP securitization seems an appropriate method for making money on products or services in terms of funding or financing industries because IP securitization captures additional value.[16] Earlier IP rights were limited as an increase in the goodwill of the borrower only but not available as security.[17] Despite the economic value of the intellectual property, in recent times it has become an important source of collateral in secured transactions.

Conclusion & Suggestions

The intellectual property recently emerged as a valuable commodity and is being used as collateral in secured transactions with increasing frequency.[18] Legal protection must be given to Intellectual Property Rights moreover they must be able to separate from the business of the borrower and should properly value so that it can be used as security for corporate debt also. Intellectual property cannot be seen by the naked eye so the registration of real rights of security in intellectual property is essential. As mentioned above valuation of intellectual property is hampered by conflicting valuation methods, problems of separability, and the small number of market transactions. An accountancy issue is the fourth issue which also faced by authorities but accountants should note that the method and effectiveness of valuation will affect the willingness of lenders to take intellectual property as security.

IP rights, as the term suggests are meant to be rights to thoughts, ideas, and information it also covers new inventions and processes. The stated purpose of such a right is to enhance industrial innovation and growth, by offering higher returns in the market. With globalization in recent times, the protection and security of such rights are a crucial concern for IP holders. Because the protection of new technologies is no more limited to the industrialized nations now. India is a member of the WTO and a signatory to the TRIPs Agreement too [19] and all the signatory States are required to provide protection to a range of Intellectual Property Rights. So for the protection of the same, securitization of IP rights is the best solution for all.

Author:  Rachi Gupta, a 4th Year - B.B.A. L.L.B. (Hons.) student of  Vivekananda Institute of Professional Studies, GGSIPU, an intern at Global Patent Filing. In case of any queries please contact/write back to us at support@globalpatentfiling.com.